New mortgage rules have sprung up during the past few months, inspiring intense debate and controversy. Hopefully, some will actually protect consumers and taxpayers.

In reaction to the recent mortgage crisis, a number of bills have been passed in Congress. Various proposals have been put forth for consideration, and significant policies have changed. Fannie Mae and Freddie Mac, for example, were given a widely expanded authority to enter the somewhat riskier arena of jumbo loans. Until March of 2008, they could only underwrite and insure a mortgage of up to $417,000. Thanks to new policy, though, they're now backing loans worth nearly twice that amount. Limits for FHA-insured loans have also been raised-and practically doubled-in an effort to bolster the mortgage market.

Debt Relief Act

There've been other changes, as well, including tax breaks in the form of PMI deductions, and the highly touted Mortgage Forgiveness Debt Relief Act of 2007, which became law at the end of last year. This lets Americans defer the taxes levied against "forgiven" debt for three years. Under current law, if the value of your property drops, but your lender accepts the market value of your home as repayment of your balance (essentially erasing the remainder of your obligations), you'll still have to pay tax on that forgiven debt as ordinary earned income.

Treasuring the Treasury

The most expansive proposal to date calls for the complete overhaul of the financial industry. "The Blueprint"-a plan that takes up more than 200 pages and was designed and presented by the U.S. Treasury Secretary-would make his department a centralized regulatory agency for a variety of financial groups, including the mortgage business. But many banks, mortgage companies, real estate professionals, Wall Street firms, and Democrats vehemently oppose it.

The Treasury proposal would, among other things, allow banks to own real estate brokerage firms and property management companies, an idea that's strongly resisted by the National Association of Realtors (NAR). Centralizing so many interests under the umbrella of the banking sector might discourage healthy competition, result in higher fees for consumers, and make it harder for Americans to find unbiased representation when buying a home. Many argue that the Treasury's revamping plan would also virtually eliminate the state banking system by overriding state authority with federal regulations, and that would limit competitive mortgage lending and oversight at state, local, and regional levels. The proposal would also create a Mortgage Origination Commission that would be in charge of setting licensing standards for mortgage brokers.

Who let the dogs out?

Arguments can be made both for and against many of these proposals and laws, and the debate will continue to rage. Only time will tell. But we may not have much time for trial, error, and experimentation. While we entertain dramatic new ideas, and pass innovative mortgage bills, the financial markets continue to mercilessly wag the economic dog by the tail, and the housing and lending industries are already sick puppies, despite all the sweeping changes.

Published on April 29, 2008